Sequencing Risk: Why Timing Matters More Than You Think in Retirement
Many clients come to us worried about what might happen if there’s a significant market downturn just before they retire. After decades of building super and investments, the idea of losing momentum at the exact moment you start drawing income can feel unsettling.
What most don’t realise is that this concern has a name: sequencing risk.
Sequencing risk refers to the impact that the order of investment returns can have on your retirement outcomes. It’s not just about how much your portfolio returns over time - it’s about when those returns occur.
If markets fall in the early years of retirement while you are withdrawing income, the impact can be lasting. You may be drawing from a reduced balance, leaving less capital to recover when markets improve.
A Simple Example
Two retirees each start with $500,000 and withdraw $25,000 per year, adjusted for inflation.
One retires just before a market downturn.
The other retires shortly after markets begin recovering.
Over the long term, average returns are similar - yet the retiree who experienced negative returns early in retirement runs out of money many years sooner.
The difference? Timing.
How Can Sequencing Risk Be Managed?
While we can’t control markets, we can structure retirement plans thoughtfully.
1. Create a Flexible Withdrawal Strategy
Rather than withdrawing a fixed amount regardless of market conditions, a more resilient approach allows for small adjustments during downturns.
For example, temporarily reducing income by 2–4% in difficult years can significantly improve the longevity of a portfolio - while increasing withdrawals again in stronger markets.
Small changes early can make a meaningful long-term difference.
2. Structure Your Portfolio by Time Horizon
Many retirement plans benefit from a “bucketing” approach:
Short-term funds (0–2 years)
Set aside for immediate living expenses in stable, low-risk assets.
Medium-term funds (3–10 years)
Invested more defensively to provide steady returns.
Long-term funds (10+ years)
Invested for growth to outpace inflation and sustain income over decades.
This structure reduces the likelihood of selling growth assets during downturns.
3. Manage Volatility Carefully
Including investments designed to reduce downside risk can help smooth the journey. Limiting the size of losses early in retirement helps protect capital and improve recovery time.
Bringing It Together
Sequencing risk is one of the most significant - yet least understood - risks in retirement planning.
The early years of retirement can be particularly important. With the right strategy, structure and guidance, it is possible to reduce the impact of market volatility and retire with greater confidence.
If you’d like to review how your retirement strategy accounts for sequencing risk, we’re always happy to have a conversation.
This article is for educational purposes only and does not constitute financial advice. Please seek personalised advice from a licensed financial adviser before making any decisions regarding your retirement or investments.